Delaware Court Of Chancery Rejects Post-Closing Disclosure Claims

Seyfarth Synopsis: The Delaware Court of Chancery reaffirmed the increasing difficulty plaintiffs face in challenging M&A transactions in a September 28, 2016 opinion dismissing two post-closing disclosure claims. The opinion sends a strong signal to practitioners that plaintiffs risk waiving any disclosure claims they fail to fully pursue pre-closing.

Background

Shortly before AOL acquired Millennial Media, a Millennial Media stockholder filed an action in which the stockholder alleged a laundry list of around 30 disclosure violations. The plaintiff stockholder advanced only one of those alleged violations at the preliminary injunction stage, which concerned certain cash flow projections relied upon by Millennial Media's financial advisor. The court denied injunctive relief because it found the plaintiff failed to demonstrate that the alleged disclosure violation was material. The merger subsequently closed with shares overwhelmingly tendering into the offer. In this post-closing action, plaintiff sought damages for the cash flow projections-related disclosure claim and a second claim that was pled but not pursued pre-merger regarding the financial advisor's contingent-fee arrangement. The Court dismissed both claims for failing to adequately allege that a majority of the Millennial board acted disloyally or in bad faith.

Takeaways

  1. A Greater Burden Must be Met to Sustain a Post-Closing Disclosure Claim Than a Claim Brought Pre-Merger. To sustain a pre-closing disclosure claim for injunctive relief, a plaintiff must demonstrate a reasonable likelihood of proving that the alleged omission or misrepresentation is material. Information is considered material if it significantly alters the total mix of information made available. By contrast, the Court requires that a plaintiff asserting a post-closing disclosure claim for damages against directors allege both (i) a material omission and (ii) that the nondisclosure resulted in a non-exculpated breach of fiduciary duty by the board. In cases where an exculpatory clause in a corporation's charter shields directors from duty-of-care claims, a plaintiff must demonstrate a non-exculpated breach by showing either that a majority of the board was not disinterested or independent or that it was otherwise disloyal because it acted in bad faith in failing to make the disclosure. A finding of bad faith requires an extreme set of facts under Delaware law indicating that directors either intentionally...

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